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The Money Making Game #5: The Disney Situation

We certainly have no problem getting caught up in the fun of playing games, but the people who create them have their pocketbooks to worry about, too. In this column, finance expert and GameSpy contributor Chris Morris guides you through the tricky corridors the gaming industry's financial side, touching on big-time business decisions and how they matter to the common gamer.

It's A Small(er) World

Disneyland might be the happiest place on Earth, but at the game development studios of the theme park's parent company... well, that's a different story. Sweeping changes are underway at the studio behind Split/Second and Epic Mickey, as new management takes over and the company's focus shifts. It's a harsh reality of business -- but it's a frustrating one for gamers, since after years of struggling as an also-ran in the gaming world, Disney was finally showing some promise.

The situation at the so-called "Mouse House" is pretty grim for traditional game-makers. In late January 2011, hundreds were laid off in an ugly bloodletting at Disney Interactive Studios (DIS) and Disney's Interactive Media Group (DIMG). And the terse statement that was released by the company hinted that another round could be on the way.

"As part of setting a strategic direction for future success in the digital media space, the Disney Interactive Media Group yesterday began a restructuring process," a Disney spokesperson said on January 24. It's that word "began" that has the people who survived the swinging ax polishing resumes and looking over their shoulders.

In the meantime, the company's executive shuffle continues. Long gone are DIMG head Steve Wadsworth and DIS leader Graham Hopper, having both departed in 2010. Others now run the show: John Pleasants, CEO of Playdom (the social game company Disney paid $763 million for last July), and Yahoo! veteran Jimmy Pitaro.

Former Disney Interactive Studios head Graham Hopper.

And the marching orders are clear.

"By putting John Pleasants in to run games, not only will he focus on turning those businesses into profitability, but diversifying our presence in the business, so we're not reliant on one platform that's obviously facing challenges," said Disney CEO Bob Iger in a conference call shortly after the appointments were announced. "It's our goal not only to be profitable, but obviously to get there by shifting our investment."

To further emphasize that shift, Disney also poached Adam Sussman, Vice President of Electronic Arts' mobile division, naming him Senior VP of Publishing for Disney Games. Sussman is credited with making EA a powerhouse in Apple's App Store, along with other platforms. That division was responsible for over $200 million in revenue, according to Sussman's LinkedIn profile.

Let's be clear: Disney's gaming group was, indeed, not getting the job done. Divisions didn't work well together. Internal efforts to build online worlds never saw a lot of success. And the unit was bleeding money. And a big part of the reason Disney couldn't get its game on was because it farmed out its top franchises to other studios, and focused chiefly on kid's games.

Over the last couple of years, though, Disney decided to get serious about things. The company tripled its investment in video games and staffed up to over 1,200 people (which, at the time, was notably bigger than Microsoft's internal game-building team). It also brought on high-level talent like industry legend Warren Spector and Bungie Studios co-founder Alex Seropian.

At the same time, Disney began doing away with the shovelware it was known for and putting out some games that turned critics' heads. Split/Second may have been a colossal sales flop, but it earned an 84% aggregate ranking on Metacritic -- and signaled that Disney was finally ready to play with the big boys of the gaming world. ).

Epic Mickey and Toy Story 3 led console sales up significantly in the most recent quarter... but those gains were offset by Playdom's acquisition costs. That indicates that, in fact, the plan was starting to work. It wasn't working fast enough, though, and management ran out of patience. From there, the path was set.

By focusing on games for Facebook and the iPhone, Disney will drastically reduce its developments costs (and thus, its risks). It also will be able to further tie product-marketing vehicles into its game releases by expanding existing brands and characters into future social media releases.

At the same time, it's worth nothing that -- though it has shifted the focus to social and mobile games -- Disney has not formally announced plans to abandon the console space. Spector and Seropian are still with the company, and have given no public indication of leaving anytime soon. ).

That's no guarantee, of course, and it's worth noting that no one in Disney's senior management ranks seems to be giving too much thought to the traditional gaming world right now. But if the new powers-that-be at the Mouse House are as astute as investors hope they are, they'll recognize that what seems to be a paradigm shift in the industry could also be a bubble -- and one that won't maintain its current levels of profitability forever.

Chris Morris has covered the video game industry since 1996, offering analysis of news and trends, and breaking several major stories, including the existence of the Game Boy Advance and the first details on Half-Life 2.